Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Big Lots Turns Around

It was a rough year for small box discounters in 2014. Family Dollar Stores (NYSE: FDO) did so badly that its management team decided to shut down 400 locations and sell out to Dollar Tree Stores (NASDAQ: DLTR), and Alco, which operated 198 stores, shut down completely.

Yet there was one interesting success among all this gloom and doom: Big Lots (NYSE: BIG). For those of you who are not familiar with it, Big Lots is a closeout discounter, which means it buys merchandise other retailers cannot sell and sells them at a steep discount. This gives Big Lots access to a higher quality of merchandise than regular discount stores and more variety. It also lowers acquisition costs for products.

Great Year at Big Lots

Despite a difficult retail environment for traditional discounters, Big Lots had a great year in 2014. Its revenue started growing again after a steep decline in 2013, rising from $5.125 billion in January 2014 to $5.177 billion in January 2015, which indicates that sales increased. Big Lots also reported a profit margin of 5.93% and delivered a diluted EPS of 2.124, a dividend yield of 1.6% and a return on equity of 14.06% to customers.


The year 2014 was also the first year since 2010 that Big Lots reported an increase in comparable store sales in every quarter. Its sales grew by 1.8% over the year, almost making up for the losses the chain reported every quarter in 2013. Unlike Family Dollar, Big Lots took part in the retail recovery and avoided the trend at larger retailers like Walmart (NYSE: WMT) and Target (NYSE: TGT), which have been struggling to maintain foot traffic.
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Not surprisingly, Big Lots’ board decided to give CEO David Campisi a raise. Campisi has spent the last two years rationalizing Big Lots operations; he shut down Canadian stores, increased food sales and started pushing furniture sales, a category other small box discounters avoid. Yet he did not make any significant changes to Big Lots’ basic business model.

A Successful Business Model

Despite its problems, Big Lots has a very sound business model. Relying on closeouts allows it to offer a lot of products that other discounters cannot. It also enables Big Lots to stock products of a higher quality and many unusual names. Yet it does not have high acquisition costs and dependence upon vendors.

Big Lots also offers the kind of treasure hunt experience that has worked very well for chains like Costco Wholesale (NASDAQ: COST), Kroger (NYSE: KR), Trader Joe’s and Dollar Tree. Customers come in and find products they do not expect at a dollar store, such as gourmet food items or organic potato chips being sold at a very low price.

This makes shopping fun and encourages customers to buy more in a sort of bargain basement imitation of the Costco effect. The Costco effect occurs when a person walks into Costco to buy one item but finds herself pushing a fully loaded shopping cart out the door. A person that walks into Big Lots to buy a bottle of dish soap might walk out with a chair or several tins of gourmet cookies.

That business model also diversifies Big Lots’ clientele; like Dollar Tree, but unlike traditional discount stores, it attracts a large percentage of middle class shoppers with more disposable income. Big Lots does this by making shopping fun, something that some dollar stores do not do.

Another advantage to Big Lots is its strategy of strategically positioning stores in urban and suburban areas. Big Lots tends to rent cheaper, older space in strip malls or standalone near busy arteries. Quite a few of these stores are located on the boundaries between low income and middle income neighborhoods or in mixed income areas to attract a diverse clientele. Big Lots lures in both the worker on food stamps and the bargain-hunting soccer mom.
This makes Big Lots a definite value play; it is a good company with a good basic business model that makes money, yet it is cheap. Big Lots was trading at $47.43 a share on April 15, 2015. That sounds a great deal like a classic Buffett value play.

To add icing to the cake, it also has a very effective management team capable of making the tough decisions needed to turn the company around. If you are looking for a cheap retail stock with a good dividend yield and future growth prospects, you should definitely check out Big Lots. It looks like a company headed for some major growth in 2015.

Disclosure: Your blogger proudly owns shares of Kroger and has no plans to sell them anytime soon.